Unfinished home properties get costlier

Costs rose from Thursday for buyers of under-construction properties because of the imposition of a service tax on builders.

Last week, the Central Board of Excise and Customs notified that a service tax of 10 per cent would be levied on the gross value of a housing property under construction from July 1.

Only properties built under the Jawaharlal Nehru National Urban Renewal Mission and the Rajiv Awaas Yojana would not be taxed.

Earlier, the abatement for housing properties was 67 per cent (meaning, the tax used to be imposed on the remaining 33 per cent of the cost).

However, the service tax was imposed on the contractor, not the builder, so the buyer didn't come into the picture.

Now, it is the builder who will have to pay, and the abatement has been made 75 per cent for single-agreement purchases (land and cost of construction combined) and 67 per cent on the cost of construction for dual agreement ones (the two separated).

Pass-on effect

Developers say they will pass on the service tax burden to buyers. "Buyers have to bear this additional cost to be levied. Though the effect is marginal, the purchasing power of buyers will come down with this," said Abhisheck Lodha, managing director, Lodha Developers.

To explain, in cities like Mumbai, the buyer can sign an agreement inclusive of land and construction costs.

For example, if you plan to book a property (under construction) worth Rs 50 lakh (Rs 5 million), you will now be levied 10 per cent service tax on 25 per cent of the gross value of the property, that is, on Rs 12.50 lakh (Rs 1.25 million).

The tax: Rs 1,25,000.

However, the rate of taxation is slightly lower in case the builder-buyer duo get into two different agreements -- one each for land and construction.

"If the land cost is recovered separately, the abatement will be 67 per cent, that is, the service tax will be levied on the remaining 33 per cent," said advocate Shailesh Sheth. And, 10 per cent rate will be applicable.

The distinction came about since the cost of land accounts for 25-40 per cent of the gross value of a property, depending on the area.

To illustrate, suppose the gross value of a property is Rs 50 lakh (Rs 5 million) and the cost of land is Rs 20 lakh (Rs 2 million).

Service tax will be levied on 33 per cent of the cost of construction, which is Rs 30 lakh (Rs 3 million); so, the service tax will be imposed on Rs 10 lakh (Rs 1 million).

At 10 per cent, the tax would be Rs 100,000.

Prashant Deshpande, senior director, Deloitte, said: "In a notification on June 29, partial payments towards properties under construction will also attract service tax, if paid after today."

That is, if you have paid 50 per cent of the money to the builder, the tax will be imposed on the remaining amount, too.

Effect not so high

So, do under-construction properties become less attractive because of this higher cost element?

Experts agree that the tax will make a difference to your budget, but only by a marginal two to three per cent.

Akshaya Kumar, chief executive, Park Lane Property Advisors, said: "A service tax should not be a key factor for zeroing on a property. If you want immediate possession, you go for readymade houses."

The main reason why most people opt for under-construction properties is that these are cheaper.

The real estate market witnesses price jumps, anywhere between 15-30 per cent annually, sometimes much more.

Consequently, by the time the property is fully developed, most buyers are sitting on a nice profit. Instead, one can negotiate the price when it is under construction.

There are other benefits as well.

You get a wider floor choice and layouts can be changed, at times, without any extra cost.

A readymade property restricts your options significantly on these fronts.